The extension of the furlough scheme to March 2021 is well received by companies suffering at the hand of the pandemic. However, what many do not realise is that furlough actually complicates their R&D claims.
Moore Kingston Smith’s R&D experts guide companies through the maze, helping them get their accounts in order and pinpointing exactly what expenditure is eligible. Equally importantly, they help minimise the risk of unforeseen tax exposure.
The furlough scheme (or Coronavirus job retention scheme) directly affects how businesses can claim under the SME (small and medium companies) and the RDEC (large companies) R&D tax schemes. Especially now when cash flow is tight, companies do not want to miss out on HMRC’s generous incentive to conduct eligible research and development projects.
How furlough affects R&D entitlement
The furlough scheme changes how eligible costs should be calculated when employees are placed on furlough. Even if businesses have claimed R&D relief previously, it is likely that their claim will change under furlough. It is vital that businesses know how HMRC assesses R&D claims in view of the furlough grants, which affects both the SME and RDEC schemes.
Businesses can claim for specific employee costs related to R&D, including both directly associated costs and eligible indirect activity. The time during which an employee is furloughed cannot be claimed for. As in accordance with HMRC’s legislation, only employees’ time directly engaged on R&D can be claimed.
However, there are exceptions. Holiday and sick pay are deemed necessary costs of employing staff conducting research and development and thus deemed eligible under the R&D tax schemes. Such costs are treated as being subsidised due to being met under the furlough scheme. While subsidies cannot be claimed under the more lucrative SME scheme, such expenditure is deemed to qualify under RDEC.
The trick is knowing what to claim for, how to structure the claim and, crucially, what else HMRC wants to know. Get it wrong and companies run the risk of being denied the cash as well as opening themselves up to wider risks.
Don’t leave it to chance; get help from the experts. Contact our Director of R&D, Thomas Hayden.